Evolution tanks after guiding to lower production & higher costs

By Market Index
Mon 27 Jun 22, 1:20pm (AEDT)
Gold production Unsplash
Source: Unsplash

Key Points

  • Evolution was was down -17.75% at the open
  • The gold miner is now guiding to a 6% year-on-year production fall
  • Evolution flagged an expected 15% quarter-on-quarter increase in the June quarter production

Evolution Mining (ASX: EVN) was down -17.75% at the open after guiding to lower production for FY22 versus FY21, while all-in costs (AISC) are now expected to be higher.

The S&P/ASX200 index gold miner is now guiding to a 6% year-on-year (this financial year) production fall. The company’s total production is now expected to come to 640,000 ounces this financial year compared to 680,788 ounces in FY21.

All-in costs are also expected to come in higher at around $1,250 an ounce, above the guidance range of $1,135 to $1,195 per ounce.

On a more positive note, Evolution flagged an expected 15% quarter-on-quarter increase in the June quarter production (170,000 ounces).

Positive long-term outlook

Due to the Red Lake project transformation taking a year longer than planned, production levels – while still higher - are now expected to be lower than it previously forecast for FY23.

Group production for FY23 and FY24 is guided to increase 12% and 11% respectively, however management has flagged a potential 5% leeway either way.

Evolution also guided to all-in costs for the coming two financial years in line with FY22 – at around $1,240 an ounce (plus or minus 5%).

Management notes the final reported all-in cost for FY22 is largely contingent on the closing copper price for June, "which is used to revalue unsettled concentrate shipments from Ernest Henry".

By comparison, in FY21 the all-in cost of $1,215 per ounce made the company among the lowest cost gold producers globally.

“These costs are higher than previously outlined due to industry-wide cost pressures and the lower production at Red Lake,” the company noted.

Turnaround at Red Lake

Evolution executive chairman Jake Klein advised investors that the group's confidence in the turnaround and potential at Red Lake is growing.

“The Cowal underground mine is on budget and schedule and the cash generation and geological upside at Ernest Henry is outstanding,” Klein noted.

"Aligned with our strategy, during this period of increasing costs and a challenging labour market all planned expenditure will be thoroughly assessed and gated with a focus on ensuring we continue to prioritise margins over volume and earn an appropriate return on capital."

Sustaining and major capital are both expected to be at the lower end of their guidance ranges of $150m–175m and $440m-$505m, respectively.

The balance sheet is strong with around $900m of liquidity including $540m of cash expected at the end of FY22.

Evolution's share price fell sharply this morning.


What brokers think

Evolution’s share price is down around -42.96% since 19 April 2022.

Consensus on the stock is Hold.

Based on Morningstar’s fair value of $4.06 the stock appears to be undervalued.

Based on the seven brokers that cover Evolution (as reported on by FN Arena) the stock is trading with 52.7% upside to the target price of $4.20.

Late June, Macquarie upgraded the company to Neutral from Underperform, while the price target falls by -10% to $3.60 on a multiple de-rating and after the broker incorporates a higher weighted average cost of capital.

Mid June saw UBS upgrade the company to Buy from Neutral, and despite the operating risks, the broker finds more value in the ASX gold sector and more need to hedge the rest of the portfolio. Target is $4.05.

Morgan Stanley lowers its target for Evolution to $4.60 from $4.90 to reflect lower gold price forecasts for FY22. However, earnings per share estimates for FY23-24 rise due to a lower forecast for the A$.

The broker maintains an Equal-weight rating.

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